Treasury Denounced Over Bailout

By EDMUND L. ANDREWS

Published: November 19, 2008

The Treasury secretary, Henry M. Paulson Jr., on Tuesday rejected pleas to use money from the $700 billion bailout program to help homeowners avoid foreclosure or to stave off bankruptcy by Detroit's Big Three automakers.

Facing a barrage of complaints from Democratic lawmakers that he was ignoring the will of Congress, Mr. Paulson dug in his heels and said he wanted to put money only into financial institutions.

''The primary purpose of the bill was to protect our financial system from collapse,'' Mr. Paulson told the House Financial Services Committee. ''The rescue package was not intended to be an economic stimulus or an economic recovery package.''

Democrats pummeled the Treasury secretary in response, with some accusing him of carrying out a ''bait and switch'' by discarding his original plan and others expressing fury that the Treasury had allocated $290 billion for banks and insurance companies but nothing for individual homeowners.

''The bill is replete with authorization to you, not simply to buy up mortgages, but in effect to do some spending,'' said Representative Barney Frank, citing a four-page list of provisions. ''Clearly part of this was not just to stabilize, but to reduce the number of foreclosures, for good macroeconomic reasons.''

The clash took place as Democratic leaders in Congress remained deadlocked with Republicans and President Bush over a $25 billion rescue package for Detroit and a broader $100 billion economic stimulus package.

Mr. Bush and Republican lawmakers oppose the measures, and Senate Democrats do not appear to have enough votes to override a filibuster.

As a result, Democratic lawmakers increasingly predict that they will have to wait until January, when President-elect Barack Obama takes office and Democrats attain a nearly filibuster-proof majority in the Senate.

Since Mr. Bush passed the bailout law six weeks ago, the Treasury has allocated about $250 billion for banks and $40 billion as part of the bailout for the American International Group, the insurance conglomerate.

Mr. Paulson acknowledged that he had the authority to use bailout money for homeowners, but he insisted that the money should go toward ''investment'' in financial institutions rather than ''spending'' on rescue efforts.

''We have seen that capital purchases are clearly powerful in terms of impact for dollar of investment,'' he said in his prepared testimony.

But Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, warned that the country could expect a tidal wave of up to five million foreclosures over the next two years if the government took no additional action.

''The stakes are too high and the time is too short to rely on voluntary agreements,'' Ms. Bair told lawmakers.

Ms. Bair, who has publicly broken ranks with the Bush administration, is proposing that the Treasury use $24.4 billion from the bailout program to help refinance and reduce the mortgage obligations of people who are delinquent on their payments and in danger of losing their homes.

Her proposal is based on a program that the F.D.I.C. already put in place for people with loans at IndyMac, the failed California bank that the agency took over this summer.

Under her plan, the Treasury would refinance mortgages for people if it is possible to reduce their monthly payments to about 32 percent of their monthly income. To encourage existing mortgage lenders to settle for lower payments, the government would accept responsibility for half of the losses if the homeowner defaults a second time.

Democratic leaders have strongly endorsed the idea. ''Further delay in implementing these solutions is unacceptable,'' said the House speaker, Nancy Pelosi of California. Mr. Obama has called for a mortgage-relief program as well.

The other major point on which Mr. Paulson clashed with the lawmakers was the rescue of the car companies.

Representative Paul E. Kanjorski, Democrat of Pennsylvania, expressed bewilderment that Mr. Paulson would bail out banks but not carmakers.

''Do you consider the loss of an automobile company a systemic risk, or don't you?'' Mr. Kanjorski said.

''I think it would be something to be avoided,'' Mr. Paulson responded.

On the Senate side of Capitol Hill, the chairmen of General Motors, Ford and Chrysler pleaded before the Senate banking committee for a $25 billion rescue package that would come on top of a $25 billion loan program that is aimed at financing the production of energy-efficient vehicles.

White House and Treasury officials said that the companies should make do with the loans, which would be made through the Energy Department.

Republican lawmakers are opposed to the Democratic efforts, but they gave Mr. Paulson a hard time as well.

Representative Spencer Bachus, Republican of Alabama, complained that Mr. Paulson was unclear about his goals and did not have an ''exit strategy'' for the government. Representative Steven C. LaTourette, Republican of Ohio, lambasted the Treasury secretary for ''picking winners and losers'' and using the bailout program to force the recent merger between PNC Financial Services and the National City Corporation.

Mr. Paulson defended his strategy, but said he hoped to avoid committing any more of the bailout money, from the troubled asset relief program, before Mr. Bush's term ends in January.

''We have learned that this financial crisis is unpredictable and difficult to counteract,'' Mr. Paulson said. ''We concluded that it was only prudent to reserve our TARP capacity, maintaining not only our flexibility, but that of the next administration.''

Ben S. Bernanke, the chairman of the Federal Reserve, testified alongside Mr. Paulson and Ms. Bair. All three officials agreed that the financial and credit crisis was far from over.

Mr. Bernanke said there were some signs that the credit markets were improving, but he cautioned that ''over all, credit conditions are still far from normal, with risk spreads remaining very elevated and banks reporting that they continued to tighten lending standards.''

PHOTOS: Henry Paulson, far left, Ben Bernanke and Sheila Bair said Tuesday that the credit crisis was not close to being over. Above, Barney Frank, chairman of the House Financial Services Committee, inquired about help for homeowners.(PHOTOGRAPHS BY STEPHEN CROWLEY/THE NEW YORK TIMES)(pg. B6)